Floor v Davis

JurisdictionEngland & Wales
CourtCourt of Appeal (Civil Division)
JudgeLORD JUSTICE BUCKLEY,SIR JOHN PENNYCUICK,LORD JUSTICE EVELEIGH
Judgment Date17 March 1978
Judgment citation (vLex)[1978] EWCA Civ J0317-1
Docket Number1975 NO.6
Date17 March 1978

[1978] EWCA Civ J0317-1

In The Supreme Court of Judicature

Court of Appeal

On Appeal from the High Court of Justice

Chancery Division

Revenue Paper

(Mr Justice Goulding)

Before:

Lord Justice Buckley

Lord Justice Eveleigh

and

Sir John Pennycuick

1975 NO.6
Between:
Ides Maria Floor (now deceased)
Applicant
and
Maurice Edward Davis (HM Inspector of Taxes)
Respondent
and between
Madame Marguerite Marie Mathilde Janssen Floor (by order dated 3rd March 1977)
Appellant (Respondent)
and
Maurice Edward Davis (HM Inspector of Taxes)
Respondent (Appellant)

MR. J. HAND (instructed by Messrs. Casson & Co., Solicitors, Greater Manchester) appeared on behalf of the Applicants (Respondents).

MR. PETER MILLETT Q.C., and MR. BRIAN DAVENPORT (instructed by The Solicitors, of Inland Revenue. Somerset House, Strand, London WC2R ILB) appeared on behalf of the Respondents (Appellants).

MR. C.N. BEATTIE Q.C. and MR. G.R. AARONSON (instructed by Messrs. Courts & Co., Solicitors, London WIM 8AP) appeared on behalf of the Appellant (Respondent).

LORD JUSTICE BUCKLEY
1

I have asked Sir John Pennycuick to read the first judgment.

SIR JOHN PENNYCUICK
2

This is an appeal from an order dated 7th July 1976 of Mr. Justice Goulding whereby he reversed a decision in favour of the Revenue by the Special Commissioners.

3

The appeal is concerned with a series of transactions effected in February and March 1969 by one Ides Maria Floor ("Major Floor") and his two sons-in-law whereby they sought to carry through a sale of their respective shares in a company known as I.D.M. Electronics Ltd ("I.D.M.") to an American company known as E.P.I. International Corporation ("K.D.I.") in auch a way as to minimise the liability to capital gains tax upon the profit resulting from the sale.

4

In the barest outline the series of transactions may be summarised thus:- (Stage 1) Major Floor and the two sons-in-law held respectively 38,075, 29,525 and 19,025 shares out of 257,404 issued shares in I.D.M. By an Agreement dated 27th February 1969 they agreed to sell their respective shares to a newly incorporated company known as F.N.W. Electronic Holdings Ltd ("F.N.W.") in consideration of the issue to them rateably of preferred shares in F.N.W., in which company they thereby came to own the whole of the issued capital. Next day, 28th February 1969, F.N.W. sold the shares in I.D.M. so acquired by it to K.D.I, in consideration of the sum of £560,889.

5

(Stage 2). Between the 27th March and the 5th April 1967 F.N.W. went through a series of operations whereby, making use of certain special provisions in its Articles, it went into liquidation and distributed six-sevenths of this sum of £560,889 to a foreign company which, through the instrumentality of a rights issue, had acquired ordinary shares in F.N.W.

6

The Revenue claims that Major Floor is chargeable with capital gains tax by reference to a proportion of the sum paid by K.D.I, to F.N.W. which corresponds to the shares in I.D.M. sold by him to F.N.W.

7

It will be convenient now to refer to the provisions of Part B III of the Finance Act 1965 which are directly relevant to the present appeal. Section 19 and the succeeding sections impose a charge of tax in respect of capital gains accruing to persons on the disposal of assets. I need not read those sections. The Act contains no definition of "disposal". Section 22 (9) introduces the provisions contained in Schedule 7. That Schedule, which is headed "Capital Gains: Miscellaneous Rules", contains the following provisions: Paragraph 4 (2): "Subject to the following subparagraphs, a reorganisation or reduction of a company's share capital be treated as involving any disposal of the original shares or any acquisition of the new holding or any part of it, but the original shares (taken as a single asset) and the new holding (taken as a single asset) shall be treated as the same asset acquired as the original shares were acquired".

8

Paragraph 6 (1): "Subject to the following subparagraphs, where a company issues shares or debentures to a person in exchange for shares in or debentures of another company, paragraph 4above shall apply with any necessary adaptations as if the two companies were the same company and the exchange were a reorganisation of its share capital". (These sub-paragraphs are relevant on Stage 1 of the series of transactions).

9

Paragraph 15 (2): "If a person having control of a company exercises his control so that value passes out of the shares in the company owned by him or a person with whom he is connected, or outof rights over the company exercisable by him or by a person with whom he is connected, and passes into other shares in or rights over the company, that shall be a disposal of the shares or rights out of which/the value passes by the person by whom they were owned or exercisable". (This sub-paragraph is relevant upon Stage 2 of the series of transactions).

10

Finally, Schedule 18 paragraph 3 (1) contains an extended definition of "control" under which a person shall be taken to have control of a company (inter alia) (a) if he possesses, or is entitled to acquire, the greater part of the share capital or voting power in the company, and concludes as follows: "Where two or more persons together satisfy any of the conditions in paragraphs (a) to (c) above they shall be deemed to have control of the company' Section 45 (1) of the Act provides "In this' part of this Act" (i.e. Fart III which includes Schedule 7 as well as Schedule 18) "unless the context otherwise requires… control shall be construed in accordance with paragraph 3 of Schedule 18 to this Act".

11

Before the Special Commissioners the Revenue based its case exclusively upon the provisions contained in Schedule 7.,i.e. paragraphs 4 (2) and 6 (1) in relation to Stage 1 of the series of transactions and paragraph 15 (2) in relation to Stage 2.

12

The Special Commissioners in paragraph 2 of the Case Stated set out the questions for decision by them in the following terms: "(i) whether when FNW Electronic Holdings Ltd. ('PHW') issued shares to the Appellant in exchange for his shares in IBM Electronics Ltd. ('IBM') FNW had or in consequence of the exchange acquired control of HM within the meaning of paragraph 6 (2) Schedule 7 Finance Act 1965;

13

(ii)whether the reference in paragraph 15 (2) of that Scheduleto a person exercising control of a company is to be read as if A it referred to persons exercising such control and

14

(iii) whether the transactions relating to FEW constituted the 'exercise of control' of the Company within the meaning of paragraph 15 (2) of Schedule 7 Finance Act 1965".

15

In paragraph 4 they set out in detail the facts, none of which was in dispute. In paragraph 5 they set out the contentions on was behalf of Major floor. In paragraph 6 they set out the contentions on behalf of the Revenue. In paragraph 8 they give a full and careful decision, accepting the contentions on behalf of Major Floor in relation to Stage 1 but accepting the contentions of the Revenue in relation to Stage 2. They accordingly dismissed Major Floor's appeal. I will treat paragraphs 4, 5, 6 and 8 of the Case Stated as read into this judgment.

16

Major Floor appealed to the High Court and his appeal was heard by Mr. Justice Goulding. Upon this appeal the Revenue raised a new contention, namely that for the purpose of capital gains tax there was a disposal by Major Floor of his shares in I.D.M. direct to K.D.I, This new contention the judge rightly dealt with first. He rejected the new contention and, like the Special Commissioners he rejected the Revenue's contentions in relation to Stage 1. But, unlike the Special Commissioners, he also rejected the Revenue's contentions in relation to Stage 2. He accordingly allowed Major Floor's appeal. The appeal before us is brought by the Revenue against that decision.

17

Major Floor died before the hearing of the appeal and his personal representative has been joined as a party in his place. The appeal, as it has now developed, raises four distinctissues, namely:- (1) Did Major Floor make a disposal of his shares in I.D.M. direct to K.D.I.? (2) Did F.N.W. obtain control of I.B.M. within the meaning of paragraphs 4 (2) and 6 (1) of Schedule 7? (3) Bid Major Floor and' his two sons-in-law together have control of F.N.W. within the meaning of paragraph 15 (2) of B Schedule 7? (4) If so, did they exercise that control within the meaning of paragraph 15 (2) when the resolution for the winding up of F.N.W. was passed? There is of course no doubt that that resolution caused value to pass out of the shares in F.N.V. held by them respectively.

18

I will endeavour to deal with these four issues in the same order. (1) The critical transactions upon this issue are (a) the Agreement dated 27th February 1969 whereby Major Floor and the entered into a binding contract with F.N.W. for the sale to F.N.W. of their respective shares in I.D.M. in consideration of the issue to them respectively of shares in F.N.W. and (b) the sale on the 28th February 1969 by F.N.W. of the shares in I.D.M. to K.D.I, for cash.

19

It is not in dispute on the one hand that these transactions, together with all the other relevant transactions, were effected pursuant to a pre-arranged scheme; and on the other hand that all the transactions were genuine, in contradistinction to colourable, transactions.

20

It was contended by Mr. Millett on behalf of the Revenue that, even apart from any contractual or equitable obligation on the part of F.N.V. to pass on the shares in I.B.M. to E.B.I., transactions (a) and (b) looked at together, as they must be, should be regarded as simply a disposal by Major Floor and the sons-in-law of their shares in I.B.M. to K.B.I. It was pointed out that the Finance Act1965 contains no definition of disposal and it was stressed that A the combined effect, or end result, of the...

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21 cases
  • Craven (HM Inspector of Taxes) v White; Commissioners of Inland Revenue v Bowater Property Developments Ltd; Baylis (HM Inspector of Taxes) v Gregory
    • United Kingdom
    • House of Lords
    • 21 July 1988
    ...by tax avoidance transactions which had no business purpose apart from avoiding income tax on the earnings of the actress. 16In Floor v. Davis [1978] Ch. 295, the dissenting judgment of Eveleigh J. held that the taxpayer failed to avoid a tax on capital gains in respect of a taxable transa......
  • W.T. Ramsay Ltd v Commissioners of Inland Revenue
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    • Chancery Division
    • 12 March 1981
    ...appealed. In the Court of Appeal the Crown's contentions (i) and (ii) were again not argued in the light of Floor v. Davis 52 TC 609;[1978] Ch 295. Lord Scarman, however, expressed the hope that the relevant decision of the Court of Appeal in that case would be reviewed by the House of Lord......
  • Fitzwilliam (Countess) and Others v Commissioners of Inland Revenue
    • United Kingdom
    • House of Lords
    • 1 July 1993
    ...one transaction into two or more has been held to be ineffective for the purpose of the tax sought to be avoided. These cases are Floor v. Davis [1978] Ch. 295 (per the dissenting judgment of Eveleigh L.J. subsequently approved by this House [1982] A.C. 300.). Chinn v. Hochstrasser [1981] ......
  • DPP v Inegbu
    • United Kingdom
    • Queen's Bench Division (Administrative Court)
    • 26 November 2008
    ...Lord Woolf stressed that it was for the repealing Act to manifest the contrary intention. He said this, after citing the case of Floor v Davies [1980] AC 695, at page 272 G: “It is the repealing Act, not the Act of 1974, which is required to manifest the contrary intention so as to exclude ......
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